Other Comprehensive Income OCI: Tax and Disclosures. CPA Exam

In this video, I discuss other comprehensive income tax effect and disclosure requirements.
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"Other Comprehensive Income" (OCI) refers to certain financial transactions that are not recorded in the traditional net income statement of a company, which typically includes revenues, expenses, gains, and losses. Instead, these items are recorded directly within equity, aside from the retained earnings. OCI is important because it reflects the financial effects of certain transactions and events that the traditional net income statement does not capture, providing a more comprehensive view of a company's total financial performance.

Items that are typically included in OCI include:

Unrealized Gains and Losses on Available-for-Sale Securities: When a company invests in financial assets, such as stocks or bonds, it doesn't record a gain or loss in net income due to fluctuations in market value until the asset is sold. These unrealized gains or losses are noted in OCI.

Foreign Currency Translation Adjustments: When a company has operations in foreign countries, those financial statements are in a foreign currency. When consolidating these statements into the parent company's financials, the amounts must be translated into the reporting currency of the parent company. The gains or losses due to changes in exchange rates are recorded in OCI.

Hedging Derivatives: When a company uses derivative instruments to hedge its exposure to fluctuations in interest rates, foreign currency exchange rates, or other market risks, the effective portion of the gain or loss on the hedging instrument is reported in OCI until the hedged item affects earnings.

Pension Plan Adjustments: Companies with defined benefit pension plans need to calculate the cost of these plans. Any difference between the projected performance of pension plan assets and their actual performance, as well as changes in actuarial assumptions, are recorded in OCI, not net income.

Revaluation Surplus (IFRS): Under International Financial Reporting Standards (IFRS), when a company revalues its property, plant, and equipment to fair value, the increases or decreases in value are recorded in OCI.

These items are accumulated in a separate component of equity called "Accumulated Other Comprehensive Income." It's important for analysts and investors to consider these items because they represent aspects of a company's overall health and performance that are not captured in net income. This is crucial for understanding the total change in an entity's equity from transactions and other events from non-owner sources.

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